Banks buy up carbon permits

“You are talking about a price which is three years away. I think there are quite reasonable arguments that [$29] is not an implausible estimate in 2015,” says Department of Climate Change head Blair Comley.

KEY POINTS

Free carbon permits to the big emitters are being bought by banks.

Companies buy back when they need to pay off carbon liabilities.

The government says it expected such a secondary market to evolve.

Major banks are offering to buy some of the 27 million carbon permits given to Australia’s biggest emitters by the federal government, as companies look to increase cash flow or pay off higher electricity costs.

The Australian Financial Review understands that at least four banks – Commonwealth Bank of Australia, National Australia Bank, Macquarie and Westpac – are looking to snap up the free permits given to emissions intensive trade exposed companies at rates higher than available through the government. The companies can then buy them back at their full price when they need to pay off their carbon liabilities next year.

The purchase is, in effect, a corporate loan and the price of the permits reflects a company’s credit risk; margins range from 150 to 400 basis points. In contrast, the government applies a fixed discount rate if businesses want to sell permits back early.

“Businesses can potentially do better elsewhere, and indeed, what’s happening is that some trade exposed businesses are looking to the banks,” Australian Industry Group chief executive Innes Willox said.

Scheme Operating as designed

“The recent activity is evidence that the scheme is operating as it was designed,” a Westpac spokeswoman said.

“Westpac is one of a number of banks supporting companies in the market and we see this as an important part of our role as a financial market intermediary.”

So far, free permits worth $620 million have been allocated to 12 trade-exposed companies.

A spokesman for Climate Change Minister Greg Combet said as the carbon market continued to develop, the government expected such secondary financial products would expand and increase carbon market liquidity

“These permits cover both direct emissions the companies are liable for but also electricity cost increases which are passed through the electricity market,” the spokesman said.

But Greens leader Christine Milne said it was evidence the government handouts were “too generous”.

“If these companies, which lobbied so hard for more permits, were worried about the price on pollution, they’d be saving the free permits, not selling them,” Senator Milne said.

Opposition environment spokesman Greg Hunt said while banks were looking to make money from the carbon tax, it all “added up to higher electricity prices”.

Meanwhile, the secretary of the Department of Climate Change has offered a lukewarm endorsement of Treasury’s prediction of a $29 carbon price by 2015.

Giving evidence to a Senate estimates inquiry on Monday, Blair Comley said the decision by the government to link to the European emissions scheme and place a cap on the use of so-called “Kyoto units” by Australian companies of 12.5 percent of total liability, made it “more likely” the Treasury modelling was correct.

$50 a tonne not inconceivable, $29 Plausible

He said it was not “inconceivable” that the price in 2015 could be $50 and highlighted actions the European Union was looking to take to bolster its emissions trading scheme.

“When you look at what the Treasury modelling was trying to do, it is still the best information we have available,” Mr Comley said. “You are talking about a price which is three years away. There are reasonable arguments that [$29] is not an implausible estimate in 2015.”

He also said placing a limit of 12.5 per cent on Kyoto permits would limit the downside in the domestic price of carbon.

“In a large-scale modelling exercise there can be variations from when you do the particular exercise, [but] I’m not aware of particularly large variations that would give you cause to be concerned about the general story that is being told by the Treasury modelling,” Mr Comley said.

“If anything, I would describe the 12.5 per cent cap [as] meaning the likely price path forecast by the Treasury modelling is actually more likely than it otherwise would be.”